*1204 ACCRUAL - INCOME FROM SALE OF LAND. - The profit from the sale of land was not properly accrued for 1935 when the acreage to be purchased had not been determined, title had not been examined or approved, and purchase and payment were dependent upon those things being done, even though the seller, without request from the purchaser, placed a deed for an excessive acreage on record and accrued on its books an excessive amount as purchase price.
*1249 The Commissioner determined a deficiency of $25,527.80 in income tax for the calendar year 1936. The only issue is whether the gain from the sale of land to the Federal Government was income for 1936 or whether it was properly accrued for tfhe preceding year.
FINDINGS OF FACT.
The petitioner is a corporation which filed its return for the taxable year with the collector of internal revenue for the District of Louisiana. It kept its books and made its returns upon an accrual method of accounting.
The petitioner, on August 2, 1935, executed a writing giving to the Secretary of Agriculture of the United*1205 States an option to buy 53,947.13 acres, more or loss, of land known as the Montrose Tract, situated in Natchitoches Parish, Louisiana, at $6.25 per acre. The petitioner agreed to sell at any time within 12 months from that date if requested by the Secretary and to convey by proper deeds. *1250 The option provided that the acreage upon which payment should be based would be determined by the department by survey; the United States might condemn lands for which satisfactory title could not be shown; the petitioner would procure and have recorded deed of conveyance to the United States and other assurances of title which might be requested by the proper representatives of the purchaser; the representatives of the Government should be allowed to enter the lands for proper purposes, including examination; and "pending vesting of title to said lands in the United States, the United States, if electing so to do, shall upon the acceptance of this option or an agreement of purchase, or at any time during the life of the option or agreement, use, occupy, and administer, for the purpose of national forests or the establishment of national forests, any or all the lands herein described*1206 without charge and subject only to the limitations and restrictions herein provided."
The National Forest Reservation Commission notified the petitioner on August 23, 1935, that it had approved the purchase of the land at the purchase price of $6.25 per acre; the Department of Agriculture "elects to purchase" in accordance with the option; the Forest Service will proceed to establish the boundaries and to "accurately ascertain the acreage"; "Immediately thereafter title examination will be made by the Office of the Solicitor of the Department"; and "Payment will be made upon approval of your title by the Attorney General of the United States, in accordance with the requirements of the Weeks Law, Act of March 1, 1911 (36 Stat. 961) and Acts amendatory thereof."
Examination of the title to the lands was begun about the latter part of November 1935, and was not completed until July 28, 1936. About one-tenth of this work had been performed at the close of 1935.
Representatives of the Forest Service entered upon the lands in the latter part of 1935 to put out a fire, to survey, to clear for and construct roads and bridges, and to cut timber for and erect temporary watch towers. *1207 They continued with this work during 1936. Some timber cut in these activities was sold to the petitioner by the United States for less than $100 in 1935.
Representatives of the petitioner conferred late in 1935 with the United States Title Attorney for the Solicitor of the Department of Agriculture, who was examining the title, to see if they could not give the United States a deed for the land at that time to avoid the state and parish taxes for 1935 and 1936. The attorney told them that the examination of title could not be completed until some months after the first of the year 1936, but that would be in plenty of time to stop the 1936 taxes; he could not advise them on the question of placing a deed on record in 1935, but could not stop the *1251 recording if they chose that course; and probably the title to most of the land would eventually be approved.
The petitioner placed a deed on record on December 13, 1935. The deed recited receipt of consideration of $337,148.62 for 53,943.78 acres, more or less, and warranted title "limited to the return of the purchase price fixed at SIX & 25/100 ($6.25) DOLLARS per acre for that land as to which title fails." The petitioner*1208 made an entry on its books on December 14, 1935, recording the sale of 53,943.78 acres for $337,148.62 and noting that the book value of the land and timber sold was $210,957.94 and $174,996.50, respectively. It did not set forth the computation of any profit or loss. The petitioner reported on its return for 1935 a profit of $126,190.68 from the sale of the 53,943.78 acres for $337,148.62, deducting only the cost of the land, $210,957.94. The return showed a loss of $1,491.01 and no tax due.
The title attorney reported to the Department of Agriculture on July 28, 1936, that the title to 53,898.70 acres had been approved. The Attorney General approved and a voucher in the amount of $336,866.87 for the purchase of that acreage was issued on August 29, 1936. Payments of that amount to the petitioner were made by checks dated September 21, 1936, and November 18, 1936. The second check was for $1,500 "retained to assure clearing of title" to a part of the acreage. The petitioner received a further payment of $31.25 on February 9, 1938, for five acres included in the deed recorded December 13, 1935.
The total profit realized by the petitioner from the sale of the lands was*1209 $125,656.41.
The total acreage sold was 53,903.70.
The Commissioner, in determining the deficiency for 1936, included in income the profit of $125,656.41.
The title attorney, before making his report of July 28, 1936, obtained a certificate from the Louisiana Tax Commission instructing the local tax assessors and sheriffs to remove the land from the 1935 and 1936 tax rolls. That certificate was obtained by reason of the deed recorded on December 13, 1935. He stated in his report of July 28, 1936, that the deed had been recorded on December 13, 1935, by the Frost Lumber Industries, Inc., on its own initiative and he thought a new deed for the correct acreage ought to be recorded. He drew up such a deed, had it executed by the seller, and approved by the Solicitor for the Department of Agriculture, but did not record it upon advice from the Department of Justice.
All additional facts contained in the stipulation are included herein by this reference.
The United States instituted concemnation proceedings in April 1938, relating to 9.65 acres included in the option and deed of 1935. *1252 Judgment was entered on June 22, 1938, awarding the lands to the Government*1210 upon payment of $30,16. The petitioner paid costs of $18.09 in the suit.
OPINION.
MURDOCK: The petitioner has devoted its brief to the law of real estate contracts in Louisiana. It argues that an irrevocable, binding contract for the sale of land resulted when the Government notified the petitioner on August 23, 1935, of the election to purchase under the option; ownership passed at that time; title passed when the deed was executed and recorded in December 1935; the Government then became unconditionally bound to pay for the land conveyed; and the petitioner, using an accrual method of accounting, properly accued the profit in 1935. It says the only thing left to be done was the fixing of the exact acreage by a survey and the examination and approval of title, but the Government was unconditionally bound to pay "in accordance with the acreage found from survey for such titles as were approved." The petitioner has neglected that accounting question, except to distinguish one case, , upon which the Commissioner does not rely. Assuming the correctness of the petitioner's argument in so far as it relates to the*1211 law of Louisiana, it nevertheless fails to support the accrual of the profit in 1935 for Federal income tax purposes.
A taxpayer on a cash basis would not properly report his profit from this transaction intil the purchase price was actually paid. That did not occur in 1935. But the date of actual payment is not decisive here, since the petitioner was using an accrual method of accounting. Section 42 provides that all items shall be included in gross income in the year of receipt, "unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period." Decision must depend upon whether or not the profit was properly accrued in 1935. It has been held repeatedly and consistently that amounts are properly accrued for income tax purpose, whether items of income or deduction, when, and only when all of the events have occurred which are necessary to fix the obligation and the amount thereof. ; ; *1212 ; ;; ; ; ; ; affd., ; Schoellkopf Aniline & Chemical*1253 ; . See also Paul & Mertens, Law of Federal Income Taxation, sec. 11.72.
The above principle decides this case for the Commissioner. All of the events necessary to fix the obligation and the amount thereof, or upon which the calculation of the amount depended, had not occurred by the close of 1935. The record is silent as to the state of the survey but it shows that the acreage had not been determined, title examination was not nearly completed, approval of any particular acreage was still absent and uncertain, and the amount*1213 later to become due as purchase price had not been determined and was not determinable as of the close of 1935. The Weeks Law, brought to the attention of the petitioner in the notice of August 23, 1935, provides that no payment may be made for forest lands until the title shall be satisfactory to the Attorney General. Cases involving the sale of a definite amount of goods for a stated price are not in point. Cf. (affd., , and , on another issue). Here, there was in 1935 a possibility, no doubt remote, that the title to none of the acreage would be approved. The amount entered upon the books in 1935 as purchase price was incorrect and based upon the false and unwarranted assumptions that there were 53,947.13 acres in the tract and title to all would be approved. But the petitioner had no way of knowing how much land would be sold and how much would be due it when the transaction finally would be completed. Thus the petitioner had no right to accrue any amount in 1935 as an obligation due it for income tax purposes.
These uncertainties were provided for in the option and acceptance*1214 and were fully realized by both parties to the transaction. The option contains statements that the acreage upon which payment should be based was to be determined by a survey to be made by the Government and deeds were to be furnished as the petitioner should be advised by the Government. The notice of election advised the petitioner that the Government was not going to be bound to take or pay for any acreage until it had established the boundaries, had determined the accurate acreage, had examined the title and had had the title approved by the Attorney General as required by law. The deed was not recorded in 1935 at the request of the Government and the recording bound the Government in no way at that time. Later, of course, it accepted the deed as sufficient for the purpose of transferring record title. Even so, the deed purported to convey more acres than were actually sold. The entry by the Government was in accordance with its rights under the option and is not inconsistent with the conclusions reached herein. The fact that the Louisiana authorities collected no taxes on the property for 1935 loses all significance in the light of the determinative factors already *1254 *1215 discussed. The condemnation proceeding detracts from the petitioner's case rather than adds thereto. It is not necessary to determine just what kind of a contract resulted from the acts of the parties, since it is clear that certain essentials for income tax purposes were completed in 1936 and not in 1935. Cf. .
Decision will be entered for the respondent.